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                          UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C.  20549


                            FORM 10-Q


  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

         For the quarterly period ended March 31, 1998

                               OR

  [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

  For the transition period from ______________to______________

              Commission File Number   0-20191

                        *  *  *  *  *  *

                       ODS NETWORKS, INC.
     (Exact name of Registrant as specified in its charter)


            Delaware                               75-1911917
-------------------------------               -------------------
(State or other jurisdiction of                (I.R.S. Employer
incorporation or organization)                Identification No.)


        1101 East Arapaho Road, Richardson, Texas 75081
        -----------------------------------------------
            (Address of principal executive offices)
                           (Zip Code)

                         (972) 234-6400
      ----------------------------------------------------
      (Registrant's telephone number, including area code)

                         Not Applicable
          -------------------------------------------
          (Former name, if changed since last report)

                        *  *  *  *  *  *

Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes  X    No
    ---      ---
                        *  *  *  *  *  *

The number of shares outstanding of the Registrant's Common Stock,
$.01 par value, on April 30, 1998 was 16,558,087.

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                                1
<PAGE>

                       ODS NETWORKS, INC.

                             INDEX

                 PART I - FINANCIAL INFORMATION

                                                                    PAGE
                                                                    ----
Item 1.  Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 1998
     and December 31, 1997 . . . . . . . . . . . . . . . . . . .      3

Condensed Consolidated Statements of Operations for the three
     months ended March 31, 1998 and March 31, 1997  . . . . . .      4

Condensed Consolidated Statements of Cash Flows for the three
     months ended March 31, 1998 and March 31, 1997. . . . . . .      5

Notes to Condensed Consolidated Financial Statements . . . . . .      6-8

Item 2.  Management's Discussion and Analysis of Results of
         Operations and Financial Condition. . . . . . . . . . .      9-16


                      PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K. . . . . . . . . . . .      17

Signature Page . . . . . . . . . . . . . . . . . . . . . . . . .      18



                                     2
<PAGE>


                  ODS NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED BALANCE SHEETS
                (In thousands, except par value amounts)

<TABLE>
                                                March 31,    Dec. 31,
                                                  1998        1997
                                                ---------    --------
                                               (Unaudited)
                               ASSETS
<S>                                              <C>          <C>
Current Assets:
   Cash and cash equivalents                     $15,609      $17,911
   Short-term investments                         11,031       14,667
   Accounts receivable (net)                      10,133        8,668
   Income taxes receivable                         3,628        3,159
   Inventories                                    17,909       14,671
   Deferred tax assets                             1,984        1,721
   Other assets                                    1,411        1,221
                                                 -------      -------
Total current assets                              61,705       62,018

Property and equipment (net)                      11,642       11,836
Long-term investments                              3,165        3,168
Equity investment                                  1,250           -
Other assets                                         172          156
                                                 -------      -------
TOTAL ASSETS                                     $77,934      $77,178
                                                 -------      -------
                                                 -------      -------

                LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                              $ 8,098      $ 5,381
   Accrued expenses                                3,224        3,328
   Deferred revenue                                1,407        1,462
                                                 -------      -------
Total current liabilities                         12,729       10,171

Deferred tax liabilities                             598          628

Stockholders' Equity:
   Preferred stock, $.01 par value,
      Authorized shares - 5,000
      No shares issued and outstanding
   Common stock, $.01 par value,
      Authorized shares - 80,000
      Issued and outstanding shares - 16,538
      in 1998 and 16,486 in 1997                     165          165
   Additional paid-in capital                     19,659       19,488
   Retained earnings                              45,059       47,032
   Foreign currency translation adjustments         (276)        (306)
                                                 -------      -------
Total stockholders' equity                        64,607       66,379
                                                 -------      -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $77,934      $77,178
                                                 -------      -------
                                                 -------      -------
</TABLE>
                      See accompanying notes.

                                3
<PAGE>

                ODS NETWORKS, INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              (In thousands, except per share amounts)
                            (Unaudited)

<TABLE>
                                                     Three Months Ended
                                                   -----------------------
                                                   March 31,     March 31,
                                                     1998          1997
                                                   ---------     ---------
<S>                                                <C>            <C>
Net sales                                          $18,213        $20,161
Cost of sales                                       10,198         11,165
                                                   -------        -------
     Gross profit                                    8,015          8,996

Operating expenses:
     Sales and marketing                             7,802          7,141
     Research and development                        2,667          2,830
     General and administrative                      1,163          1,262
                                                   -------        -------
Operating loss                                      (3,617)        (2,237)

Interest income, net                                   439            337
                                                   -------        -------
Loss before income taxes                            (3,178)        (1,900)

Income tax (benefit) provision                      (1,204)          (722)
                                                   -------        -------
Net loss                                           $(1,974)       $(1,178)
                                                   -------        -------
                                                   -------        -------
Basic and Diluted loss per share                   $ (0.12)       $ (0.07)
                                                   -------        -------
                                                   -------        -------
Weighted average common shares
   outstanding                                      16,503         16,383
                                                   -------        -------
                                                   -------        -------
Weighted average shares outstanding
   assuming dilution                                16,503         16,383
                                                   -------        -------
                                                   -------        -------
</TABLE>

                      See accompanying notes.

                                4
<PAGE>

                ODS NETWORKS, INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (In thousands)
                            (Unaudited)

<TABLE>
                                                      Three Months Ended
                                                   ------------------------
                                                   March 31,      March 31,
                                                     1998           1997
                                                   ---------      ---------
<S>                                                <C>            <C>
Operating Activities:
Net income (loss)                                  ($1,974)       ($1,178)
Adjustments to reconcile net income (loss) to
 net cash provided (used) by operating activities:
  Depreciation                                         821            739
  Deferred income taxes                               (293)          (516)
  Provision for doubtful accounts and returns           -              20
  Changes in operating assets and liabilities:
      Accounts receivable                           (1,465)         3,499
      Income taxes receivable                         (469)          (345)
      Inventories                                   (3,238)          (822)
      Other assets                                    (206)          (271)
      Accounts payable and accrued expenses          2,614             80
      Deferred revenue                                 (55)          (322)
                                                   -------        -------
Net cash provided by (used in) operating
  activities                                        (4,265)           884
                                                   -------        -------
Investing Activities:
  Equity Investment                                 (1,250)            -
  Purchases of short-term investments                  -           (2,200)
  Maturities of short-term investments               3,636          5,872
  Purchases of long-term investments                   -           (2,488)
  Maturities of long-term investments                    3            -
  Purchases of property and equipment                 (627)        (1,065)
                                                   -------        -------
Net cash provided by investing activities            1,762            119
                                                   -------        -------
Financing Activities:
  Exercise of warrants and employee stock options      171            165
                                                   -------        -------
Net cash provided by financing activities              171            165
                                                   -------        -------
Effect of foreign currency translation
 adjustment on cash and cash equivalents                30             (1)
                                                   -------        -------
Net increase (decrease) in cash and cash
 equivalents                                        (2,302)         1,167

Cash and cash equivalents at beginning of
 period                                             17,911          6,565
                                                   -------        -------
Cash and cash equivalents at end of period         $15,609        $ 7,732
                                                   -------        -------
                                                   -------        -------

Supplemental disclosure of income taxes paid       $   -          $   179
                                                   -------        -------
                                                   -------        -------
</TABLE>

                           See accompanying notes.
                                       
                                       5
<PAGE>

                      ODS NETWORKS, INC. AND SUBSIDIARIES
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note A - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.  The December 31, 1997 balance sheet was
derived from audited financial statements, but does not include all the
disclosures required by generally accepted accounting principles.  However, the
Company believes that the disclosures are adequate to make the information
presented not misleading.  In the opinion of management, all the adjustments
(consisting of normal recurring adjustments) considered necessary for fair
presentation have been included. The results of operations for the three month
period ending March 31, 1998 are not necessarily indicative of the results
which may be achieved for the full fiscal year or for any future period.  The
condensed consolidated financial statements included herein should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.


Computation of Net Income Per Share

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128
on December 31, 1997 and has restated all EPS data presented.  Under SFAS No.
128 the Company is required to report two separate earnings per share numbers,
basic EPS and diluted EPS.  Diluted EPS is essentially the same number the
Company has previously reported as primary earnings per share and includes the
dilutive impact of employee stock options and warrants.

Equity Investment

In March 1998, the Company invested $1.25 million in Blue Ridge Networks, 
Inc. a privately-held company which provides secure remote access products 
for local and wide area virtual private networks.  This investment will be 
accounted for using the equity method of accounting.  The Company's share of 
earnings or losses of Blue Ridge Networks, Inc. will be reported in the 
income statement of the Company.

Business Combinations

Subsequent to March 31, 1998, the Company announced a definitive agreement to
purchase Essential Communications Corporation (Essential), a privately-held
company which designs and manufactures high-speed computer network equipment.
Under the terms of the agreement the Company will exchange a combination of
$5.8 million of cash and approximately 305,500 shares of the Company's common
stock for all outstanding shares of Essential.  In addition, the Company will
assume the Essential stock option plan, and the Company will reserve
approximately 100,500 shares of the Company's stock to be issued upon the
exercise of options.  In connection with the acquisition, the Company expects
to recognize a one-time charge against after-tax earnings of between $4.5
million and $5.5 million, or $0.27 to $0.33 per share, for in-process
technology in the second quarter of 1998.  This acquisition is expected to be
completed during the second quarter of 1998 

                                     6
<PAGE>

subject to various closing conditions including Essential stockholder 
approval.

 Exchange of Stock Options in First Quarter 1998

     On January 21, 1998, the Compensation Committee of the Board of Directors
approved a stock option exchange program (the Exchange Program), pursuant to
which certain employees and officers holding incentive stock options (i)
awarded under the Company's 1987 Incentive Stock Option Plan in 1997 and (ii)
awarded prior to December 31, 1997, under the Company's 1995 Stock Option Plan
(the 1995 Plan), were given the opportunity to exchange such options (Existing
Options) for new options (New Options), based on the fair market value of the
Company's Common Stock at the close of business on January 30, 1998.  All
directors of the Company, including  the President and Chief Executive Officer,
and the Senior Vice President were ineligible to participate in the Exchange
Program.

     As a result of significant declines in the market value of the Company's
Common Stock since issuance of the Existing Options, the Existing Options were
exercisable at prices which substantially exceeded the market value of the
Common Stock.  In approving the Exchange Program and in keeping with the
Company's philosophy of utilizing equity incentives to motivate and retain
qualified employees, the Compensation Committee acknowledged that retention and
attraction of qualified employees are critical to the Company's success and its
ability to continue to meet its performance objectives.  Additionally,
recognizing that stock options constitute a significant component of the
Company's compensation structure, the Compensation Committee deemed it
important to regain the incentive intended to be provided by the New Options to
purchase shares of the Company's Common Stock and therefore serve as a
significant factor in the Company's ability to continue to attract and retain
the services of superior quality personnel.

     Pursuant to the Exchange Program, holders of the Existing Options were
offered the opportunity to exchange, on a share-for-share basis, such options
for New Options having an exercise price of $7.50 per share, the fair market
value of the Company's Common Stock on the exchange date of January 30, 1998.
Each New Option was awarded under the 1995 Plan and vests and is exercisable
with respect to 20% of the shares covered thereby on each anniversary date
thereof. Eligible employees holding Existing Options for an aggregate of
646,800 shares of Common Stock with an average per share exercise price of
approximately $15.87 elected to participate in the Exchange Program and were
issued New Options covering the same aggregate number of underlying shares as
they had held pursuant to their respective Existing Options.  Other than the
new exercise price and the commencement of a new vesting schedule, the option
agreements relating to the New Options are substantially identical to the
option agreements of the Existing Options they replaced.

                                      7
<PAGE>

Note B - Inventories (in Thousands)

Inventories consist of:

<TABLE>
                                         March 31,      Dec. 31,
                                           1998           1997
                                        ------------------------
                                        (unaudited)
<S>                                      <C>            <C>
   Raw materials                         $ 7,359        $ 4,077
   Work in process                         2,062          2,004
   Finished products                       6,007          6,593
   Demonstration systems                   2,481          1,997
                                         -------        -------
                                         $17,909        $14,671
                                         -------        -------
                                         -------        -------
</TABLE>

Note C - Accrued Expenses (in Thousands)

Included in accrued expenses are the following:

<TABLE>
                                          March 31,     Dec. 31,
                                            1998          1997
                                         -----------------------
                                         (unaudited)
<S>                                      <C>            <C>
      Accrued sales commissions          $   625        $   563
      Accrued property taxes                 189            689
      Accrued vacation expense               836            724
      Accrued incentive bonus                214             -
      Accrued warranty expense               475            475
      Other (individually less than
       5% of current liabilities)            885            877
                                         -------        --------
                                         $ 3,224        $ 3,328
                                         -------        --------
                                         -------        --------
</TABLE>

Note D - Earnings per Share (in Thousands, except per share amounts)

<TABLE>
                                             Three Months Ended
                                           -----------------------
                                           March 31,     March 31,
                                             1998          1997
                                           -----------------------
<S>                                        <C>           <C>
      Numerator:
      Net loss                             $(1,974)      $(1,178)
                                           -------       -------
      Numerator for basic and diluted
        earnings per share                 $(1,974)      $(1,178)

      Denominator:

      Denominator for basic earnings
        per share - weighted average
        common shares outstanding           16,503        16,383

      Effect of dilutive securities:
        Stock options and warrants               0             0
      Denominator for diluted earnings
        per share - adjusted weighted
        average common shares out-
        standing                            16,503        16,383
                                           -------       -------
                                           -------       -------
        Basic loss per share               $ (0.12)      $ (0.07)
                                           -------       -------
                                           -------       -------
        Diluted loss per share             $ (0.12)      $ (0.07)
                                           -------       -------
                                           -------       -------
</TABLE>

                               8
<PAGE>

Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS


"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995

 This Quarterly Report, other than historical information, includes forward-
looking statements, including statements with respect to completing the
acquisition of Essential Communication Corporation, financial results, product
introductions, market demand, sales channels, industry trends, sufficiency of
cash resources and certain other matters.  These statements are made under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and involve risks and uncertainties which could cause actual results to
differ materially from those in the forward-looking statements, including those
discussed in the section entitled   "Factors That May Affect Future Results of
Operations" and elsewhere in this Quarterly Report as well as those discussed
in the Company's Form 10-K and other filings with the Securities and Exchange
Commission.

The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales:

<TABLE>
                                             Three Months Ended
                                             ------------------
                                                  March 31,
                                             ------------------
                                                1998    1997
                                                ----    ----
<S>                                            <C>      <C>
Net sales                                      100.0%   100.0%
Cost of sales                                   56.0     55.4
Sales and marketing expenses                    42.8     35.4
Research and development expenses               14.6     14.0
General and administrative expenses              6.4      6.3
                                               -----    -----
Operating loss                                 (19.8)   (11.1)
Interest income, net                             2.4      1.7
                                               -----    -----
Loss before income taxes                       (17.4)    (9.4)
Income tax (benefit) provision                  (6.6)    (3.6)
                                               -----    -----
Net loss                                       (10.8)%   (5.8)%
                                               -----    -----
                                               -----    -----
Switching product sales                         41.1%    26.4%
Shared bandwidth hub sales                      49.8     66.6
Other sales                                      9.1      7.0
                                               -----    -----
Net sales                                      100.0%   100.0%
                                               -----    -----
                                               -----    -----

Domestic sales                                  80.6%    78.4%
Export sales to:
  Europe                                        12.2     10.2
  Canada                                         4.5      5.2
  Asia                                           2.1      4.1
  Latin America                                  0.6      2.1
                                               -----    -----
Net sales                                      100.0%   100.0%
                                               -----    -----
                                               -----    -----
</TABLE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                  9
<PAGE>

RESULTS OF OPERATIONS

     NET SALES.  Net sales for the quarter ended March 31, 1998 decreased to
$18.2 million compared to $20.2 million for the same period of 1997 as sales of
the Company's new network switching products did not increase quickly enough to
offset the decrease in sales of its prior generation shared bandwidth
intelligent hubs.  Demand for prior generation shared bandwidth intelligent
hubs may continue to decline as the market transitions to switching products
with enhanced price/performance characteristics.

     Export sales for the quarter ended March 31, 1998 decreased to $3.5
million compared to $4.3 million for the same period of 1997 primarily due to
adverse economic developments in Malaysia and South Korea.

     Sales to Electronic Data Systems Corporation ("EDS") were 13.7% of net
sales during the quarter ended March 31, 1998, compared to 14.3% of net sales
for the same period of 1997. Direct net sales to various agencies of the U.S.
Government were 13.7% of net sales during the quarter ended March 31, 1998
compared to 9.4% of net sales for the same period of 1997.  In addition, a
portion of the Company's sales to EDS and other corporations were resold by
those organizations to various agencies of the U.S. Government.

     GROSS PROFIT.  Gross profit decreased to $8.0 million or 44.0% of net
sales for the first quarter of 1998 compared to $9.0 million or 44.6% of net
sales for the first quarter of 1997.  Gross profit margins in future periods
may be affected by several factors such as continued product transition,
declining market demand for prior generation products, obsolescence or surplus
of inventory, shifts in product mix, changes in channels of distribution, sales
volume, fluctuation in manufacturing costs, pricing strategies of the Company
and its competitors and fluctuations in sales of integrated third-party
products. Gross profit margins are typically lower on sales of integrated third-
party products.

     SALES AND MARKETING.  Sales and marketing expenses increased to
$7.8 million or 42.8% of net sales for the first quarter of 1998 compared to
$7.1 million or 35.4% of net sales for the first quarter of 1997. The increase
in sales and marketing expense was primarily due to higher levels of staffing
in sales, marketing and technical support and associated costs.  The Company
expects sales and marketing expenses to continue to increase in amount, but may
vary as a percentage of net sales in the future.

     RESEARCH AND DEVELOPMENT.  Research and development expenses decreased
slightly to $2.7 million or 14.6% of net sales for the first quarter of 1998
compared to $2.8 million or 14.0% of net sales for the first quarter of 1997.
The Company expects to continue to invest in research and development
activities in the future in an effort to broaden its family of network
switching, management and security products.

     
     GENERAL AND ADMINISTRATIVE.  General and administrative expenses decreased
slightly to $1.2 million or 6.4% of net sales for the first quarter of 1998
from $1.3 million or 6.3% of net sales for the first quarter of 1997. As the
Company continues to expand its domestic and foreign operations, general and
administrative expenses are expected to increase in amount, but may vary as a
percentage of net sales in the future.

     INTEREST.  Net interest income increased slightly to $0.4 million for the
first quarter of 1998 compared to $0.3 million for the same period in 1997. Net

                                        10
<PAGE>

interest income may vary in the future based on the Company's cash flow and
rate of return on investments.

     INCOME TAXES.  The Company's effective income tax rate remained relatively
unchanged at 37.9% for the quarter ended March 31, 1998 compared to 38.0% for
the same period in 1997.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of liquidity at March 31, 1998 were
$15.6 million of cash and cash equivalents, $11.0 million of short-term
investments, $3.2 million of highly liquid investments with a stated maturity
beyond one year and an available line of credit with $15.0 million of maximum
available borrowings.  As of March 31, 1998, working capital was $49.0 million
compared to $51.8 million as of December 31, 1997.

     Cash flows used in operations for the first quarter of 1998 were $4.3
million, primarily due to an increase in inventory and accounts receivable
balances and a net loss for the period partially offset by an increase in
accounts payable.  Future fluctuations in accounts receivable and inventory
balances will be dependent upon several factors, including but not limited to
quarterly sales, ability to collect accounts receivable timely, the Company's
strategy as to building inventory in advance of receiving orders from
customers, and the accuracy of the Company's forecasts of product demand and
component requirements.

     Cash provided by investing activities in the first quarter of 1998 
consisted of net maturities of short-term and long-term investments of $3.6 
million partially offset by property and equipment purchases of $0.6 million 
and an equity investment of $1.25 million.  The Company invested $1.25 
million in Blue Ridge Networks, Inc. a private corporation which provides 
secure remote access products for local and wide area virtual private 
networks.

     Cash provided by financing activities in the first quarter of 1998 was
$0.2 million, which consisted of the issuance of common stock relating to the
exercise of employee stock options.

     During the first quarter of 1998 the Company funded its operations solely
through cash flow from operations.  The Company has a bank line of credit
agreement with $15.0 million of maximum available borrowings.  Borrowings under
this line are secured by the Company's accounts receivable and inventory and
are subject to certain limitations and conditions, including the maintenance of
certain financial ratios and minimum net tangible worth amounts.  Borrowings on
this line accrue interest at prime with interest due monthly and principal due
April 12, 1999.  As of March 31, 1998, the Company had no borrowings
outstanding under its bank credit facility and had $15.0 million available for
allowable borrowings at an applicable interest rate of 8.5% per annum.

       Subsequent to March 31, 1998, the Company announced a definitive
agreement to purchase Essential Communications Corporation (Essential), a
privately-held company which designs and manufactures high-speed computer
network equipment. Under the terms of the agreement the Company will exchange a
combination of $5.8 million of cash and approximately 305,500 shares of the
Company's common stock for all outstanding shares of Essential.  In addition,
the Company will assume the Essential stock option plan, and the Company will
reserve approximately 100,500 shares of the Company's stock to be issued upon
the exercise of options. This acquisition is expected to be completed during
the second quarter of 1998 subject to various closing conditions including
Essential stockholder approval.

     The Company believes that its cash, cash equivalents and investment

                                    11
<PAGE>

balances, cash expected to be generated from operations and the availability 
of borrowings under its bank credit facility will provide sufficient cash 
resources to finance its operations, acquisition of Essential Communications 
Corporation and currently projected capital expenditures through 1998.  
However, there can be no assurance the Company's cash resources will be 
sufficient for 1998 or future periods.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
             
As noted above, this report includes foregoing discussions including forward-
looking statements that involve risks and uncertainties.  In addition to those
factors discussed elsewhere in this quarterly report and those discussed in the
Company's annual report on Form 10-K and other filings with the Securities and
Exchange Commission, the Company identifies the following factors which could
affect the Company's actual results and cause actual results to differ
materially from those in the forward-looking statements.

TECHNOLOGICAL CHANGES.  The market for the Company's products is 
characterized by frequent product introductions, rapidly changing technology 
and continued evolution of new industry standards. The market for network 
intelligent hubs and switches requires the Company's products to be 
compatible and interoperable with products and architectures offered by 
various vendors, including other networking products, workstation and 
personal computer architectures and computer and network operating systems.  
The Company's success will depend to a substantial degree upon its ability to 
develop and introduce in a timely manner new products and enhancements to its 
existing products that meet changing customer requirements and evolving 
industry standards.  The development of technologically advanced products is 
a complex and uncertain process requiring high levels of innovation as well 
as the accurate anticipation of technological and market trends.  There can 
be no assurance that the Company will be able to identify, develop, 
manufacture, market and support new or enhanced products successfully in a 
timely manner.  Further, the Company or its competitors may introduce new 
products or product enhancements that shorten the life cycle of or obsolete 
the Company's existing product lines which could have a material adverse 
effect on the Company's business, operating results and financial condition.

COMPETITION AND MARKET ACCEPTANCE.  The market for network intelligent hubs 
and switches is intensely competitive and subject to frequent product 
introductions with improved price/performance characteristics.  Even if the 
Company does introduce advanced products which meet evolving customer 
requirements in a timely manner, there can be no assurance that the new 
Company products will gain market acceptance.  Many networking companies, 
including Cisco Systems, Inc. ("Cisco"), Cabletron Systems, Inc. 
("Cabletron"), Bay Networks, Inc. ("Bay Networks"), FORE Systems, Inc. ("FORE 
Systems"), Xylan Corporation ("Xylan") and others, have substantially greater 
financial, technical, sales and marketing resources, better name recognition 
and a larger customer base than the Company.  Many of the Company's large 
competitors offer customers a broader product line which provides a more 
comprehensive networking solution than the Company currently offers.  The 
Company anticipates increased competition from large telecommunication 
equipment vendors which are expanding their capabilities in the data 
networking market.  For example, Lucent Technologies has acquired several 
networking companies to enhance its capabilities in data networking.    
Further the Company anticipates increased competition from private "start-up" 
companies that have developed or are developing advanced network switching 
products.  Increased competition in the networking industry could result in 
significant price competition, reduced profit margins or loss of market 
share, any of which could have a material adverse effect on the Company's 
business, operating results and financial condition. The Company is 
pursuing a strategy to increase the percentage of its revenue generated 
through indirect sales channels including value added resellers, system 

                                   12
<PAGE>

integrators, original equipment manufacturers and network service providers.  
There can be no assurance that the Company's products will gain market 
acceptance in these indirect sales channels.  Further, competition among 
networking companies to sell products through these indirect sales channels 
could result in significant price competition and reduced profit margins.     

     The Company is also pursuing a strategy to broaden and further 
differentiate its product line by introducing complementary network 
switching, management and security products and incorporating new 
technologies into its existing product line.  There can be no assurance that 
the Company will successfully introduce these products or that such products 
will gain market acceptance.  The Company anticipates competition from 
networking companies, network security companies and others in each of its 
product lines.  The Company anticipates that profit margins will vary among 
its product lines and that product mix fluctuations could have an adverse 
effect on the Company's overall profit margins.
             

ACQUISITIONS. Cisco, Cabletron, Bay Networks, FORE Systems, Lucent
Technologies and other competitors have recently acquired several networking
companies with complementary technologies, and the Company anticipates that
such acquisitions will continue in the future. These acquisitions may permit
such competitors to accelerate the development and commercialization of
broader product lines and more comprehensive networking solutions than the
Company currently offers.  In the past, the Company has relied upon a
combination of internal product development and partnerships with other
networking vendors to provide competitive networking solutions to customers.
Certain of the recent and future acquisitions by the Company's competitors may
have the effect of limiting the Company's access to commercially significant
technologies.  Further, the business combinations and acquisitions in the
networking industry are creating companies with larger market shares, customer
bases, sales forces, product offerings and technology and marketing expertise.
There can be no assurance that the Company will be able to compete
successfully in such an environment.

In March 1998, the Company invested $1.25 million in Blue Ridge Networks, Inc.
a private corporation which provides secure remote access products for local
and wide area virtual private networks.  Subsequent to March 31, 1998, the
Company announced a definitive agreement to purchase Essential Communications
Corporation, a privately-held company which designs and manufactures high-
speed computer network equipment. The Company may, in the future, acquire or
invest in another company, business unit, product line, or technology to
accelerate the development of products and sales channels complementary to the
Company's existing products and sales channels.  Acquisitions involve numerous
risks, including difficulties in assimilation of operations,  technologies,
and products of the acquired companies; risks of entering markets in which the
Company has no or limited direct prior experience and where competitors in
such markets have stronger market positions; the potential loss of key
employees of the acquired company; and the diversion of management's attention
from normal daily operation of the Company's business.

PRODUCT TRANSITIONS.  Once current networking products have been in the market
place for a period of time and begin to be replaced by higher performance
products (whether of the Company's or a competitor's design), the Company
expects the net sales of such networking products to decrease. In order to
achieve revenue growth in the future, the Company will be required to design,
develop and successfully commercialize higher performance products in a timely
manner.  For example,  the market for shared bandwidth intelligent hubs, sales
of which represented the  majority of the Company's net sales over the past
several years,  decreased in the first quarter of 1998 compared to the same
period of 1997 and may continue to decrease as switching products with
enhanced price/performance characteristics gain market acceptance.  There can
be no assurance that the 

                                  13
<PAGE>

Company will be able to introduce new products and gain market acceptance 
quickly enough to avoid adverse revenue transition patterns during current or 
future product transitions.

MANUFACTURING AND AVAILABILITY OF COMPONENTS.  The Company's manufacturing 
operations consist primarily of final assembly, testing and quality control 
of subassemblies and finished units.  Materials used by the Company in its 
manufacturing processes include semiconductors such as microprocessors, 
memory chips and application specific integrated circuits ("ASICs"), printed 
circuit boards, power supplies and enclosures.  All of the materials used in 
the Company's products are purchased under contracts and purchase orders with 
third parties.  While the Company believes that many of the materials used in 
the production of its products are generally readily available from a variety 
of sources, certain components are available from one or a limited number of 
suppliers.  For example, certain ASICs designed into the Company's 
InfiniteSwitch products are supplied by FORE Systems (see "Factors That May 
Affect Future Results of Operations - Competition and Market Acceptance"). 
The lead times for delivery of components vary significantly and exceed 
twelve weeks for certain components.  If the Company should fail to forecast 
its requirements accurately for components, it may experience excess 
inventory or shortages of certain components which could have an adverse 
effect on the Company's business and operating results.  Further, any 
interruption in the supply of any of these components, or the inability of 
the Company to procure these components from alternative sources at 
acceptable prices within a reasonable time, could have an adverse effect on 
the Company's business and operating results.

THIRD-PARTY PRODUCTS.  The Company believes that it is beneficial to work 
with third parties with complementary technologies to broaden the appeal of 
the Company's switches, intelligent hub and network security products.  These 
alliances allow ODS to provide integrated solutions to its customers, 
combining ODS developed technology with third-party products such as certain 
routers from Cisco, ATM switches from FORE systems and Gigabit Ethernet 
switch technology from Lucent Technologies.  As the Company also competes 
with these technology partners in certain segments of the market, there can 
be no assurance that the Company will have access to all of the third-party 
products which may be desirable to offer fully integrated solutions to ODS 
customers.
            
DEPENDENCE ON KEY CUSTOMERS.   A relatively small number of customers have 
accounted for a significant portion of the Company's revenue. U.S. Government 
agencies and strategic network integrators, such as EDS, are expected to 
continue to account for a substantial portion of the Company's net revenue. 
The Company continuously faces competition from Cisco, Cabletron, Bay 
Networks, FORE Systems, Xylan and others for U.S. Government networking 
projects and corporate networking installations.  Any reduction or delay in 
sales of the Company's products to these customers could have a material 
adverse effect on the Company's operating results.

INTERNATIONAL OPERATIONS.  Export sales accounted for approximately 19.4% of 
the Company's revenue in the first quarter of 1998.  The Company expects that 
export sales will represent a significant portion of its business in the 
future.  The Company's international operations may be affected by changes in 
demand resulting from fluctuations in currency exchange rates and local 
purchasing practices, including seasonal fluctuations in demand, as well as 
by risks such as increases in duty rates, difficulties in distribution and 
other constraints upon international trade.  For example, the fluctuations in 
currency exchange rates and adverse economic developments in Malaysia, South 
Korea and certain other 

                                 14
<PAGE>

countries adversely affected demand for the Company's products in those 
countries in the fourth quarter of 1997 and the first quarter of 1998.  These 
conditions may continue to adversely affect demand for the Company's products 
in those countries throughout 1998.  Additionally, while the Company's 
current products are designed to meet relevant regulatory requirements of the 
foreign markets in which they are sold, any inability to obtain any required 
foreign regulatory approvals on a timely basis could have a material adverse 
effect on the Company's operating results.

INTELLECTUAL PROPERTY.  The Company's success and its ability to compete is 
dependent, in part, upon its proprietary technology.  The Company does not 
hold any issued patents and currently relies on a combination of contractual 
rights, trade secrets and copyright laws to establish and protect its 
proprietary rights in its products.  There can be no assurance that the steps 
taken by the Company to protect its intellectual property will be adequate to 
prevent misappropriation of its technology or that the Company's competitors 
will not independently develop technologies that are substantially equivalent 
or superior to the Company's technology.

The Company is also subject to the risk of adverse claims and litigation 
alleging infringement of intellectual property rights of others.  The Company 
could incur substantial costs in defending itself and its customers against 
any such claim regardless of the merits of such claims.  In the event of a 
successful claim of infringement, the Company may be required to obtain one 
or more licenses from third parties.  There can be no assurance that the 
Company could obtain the necessary licenses on reasonable terms.
            
IMPACT OF YEAR 2000.   Some of the Company's older computer programs were 
written using two digits rather than four to define the applicable year.  As 
a result, those computer programs have time-sensitive software that recognize 
a date using "00" as the year 1900 rather than the year 2000.  This could 
cause a system failure or miscalculations causing disruptions of operations, 
including, among other things, a temporary inability to process transactions, 
send invoices, or engage in similar normal business activities.
            
The Company has completed an assessment and will have to modify or replace 
portions of its software so that its computer systems will function properly 
with respect to dates in the year 2000 and thereafter.  The total Year 2000 
project cost is estimated to be immaterial.
             
The Company has initiated communications with all of its significant 
suppliers and large customers to determine the extent to which the Company's 
interface systems are vulnerable to those third parties' failure to remediate 
their own Year 2000 Issues.  There can be no guarantee that the systems of 
other companies on which the Company's systems rely will be timely converted 
and would not have an adverse effect on the Company's systems.  The Company 
has determined it has immaterial exposure to contingencies related to the 
Year 2000 Issue for the products it has sold.
             
The Year 2000 project is estimated to be completed not later than December 31,
1998, which is prior to any anticipated impact on its operating systems.  
The Company believes that with modifications to existing software and 
conversions to new software, the Year 2000 issue will not pose significant 
operational problems for its computer systems.  However, if such 
modifications and conversions are not made, or are not completed timely, the 
Year 2000 issue could have a material impact on the operations of the Company.
             
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,

                                   15
<PAGE>

which were derived utilizing numerous assumptions of future events, including
the continuous availability of certain resources and other factors.  However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated.  Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
             
GENERAL.  Sales of networking products fluctuate, from time to time, based on
numerous factors, including customers' capital spending levels and general
economic conditions.  While certain industry analysts believe that there is a
significant market for network intelligent hubs, switches, management and
security products, there can be no assurance as to the rate or extent of the
growth of such market or the potential adoption of alternative technologies.
Future declines in networking product sales as a result of general economic
conditions, adoption of alternative technologies or any other reason could have
a material adverse effect on the Company's business, operating results and
financial condition.

Due to the factors noted above and elsewhere in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis.  Past financial performance should not be considered a
reliable indicator of future performance and investors should not use
historical trends to anticipate results or trends in future periods.  Any
shortfall in revenue and earnings from the levels anticipated by securities
analysts could have an immediate and significant effect on the trading price of
the Company's common stock in any given period.  Also, the Company participates
in a highly dynamic industry which often results in volatility of the Company's
common stock price.

                                      16
<PAGE>

                          PART II - OTHER INFORMATION


Item 6.   EXHIBITS AND REPORTS ON FORM 8-K.

          (A.) EXHIBITS.  The following exhibits are included herein:

                      (2)    Agreement and Plan of Merger, dated April 30, 
                             1998, by and among the Registrant, ECC 
                             Acquisition Corp., and Essential Communication 
                             Corporation. (The scheduels and exhibits which 
                             are referenced in the table of contents and 
                             elsewhere in such Agreement are hereby 
                             incorporated by reference. Such schedules and 
                             exhibits which are not included as exhibits to 
                             this Form 10-Q will be furnished supplementally 
                             to the Commission upon request.)
               
                     (27)    Financial Data Schedule
                 
          (B.) FORM 8-K. The Registrant filed no reports on Form 8-K
                         and none were required to be filed during the 
                         three months ended March 31, 1998.

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<PAGE>

                        S I G N A T U R E S




Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                    ODS NETWORKS, INC.
                                        (Company)



Date: May 7, 1998                   By: /s/ TIMOTHY W. KINNEAR
                                        -----------------------------------
                                        Timothy W. Kinnear
                                        Chief Financial Officer
                                        (Principal Financial Officer)



                                    By: /s/ KANDIS TATE THOMPSON
                                        -----------------------------------
                                        Kandis Tate Thompson
                                        Controller - Finance and Accounting
                                        (Principal Accounting Officer)

                                      18
<PAGE>

                               EXHIBIT INDEX

EXHIBIT

      2    Agreement and Plan of Merger, dated April 30, 1998, by and among 
           the Registrant, ECC Acquisition Corp., and Essential Communication 
           Corporation. (The scheduels and exhibits which are referenced in 
           the table of contents and elsewhere in such Agreement are hereby 
           incorporated by reference. Such schedules and exhibits which are 
           not included as exhibits to this Form 10-Q will be furnished 
           supplementally to the Commission upon request.)
     
     27    Financial Data Schedule







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